UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-50047

I.R.S. Employer Identification No.: 52-1948274

State of incorporation: Maryland

Address of principal executive offices: 24 North Main Street, Berlin, Maryland 21811

Issuer’s telephone number: (410) 641-1700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES   X   NO ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer ____ Accelerated filer   X   Non-accelerated filer ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ____ NO   X  

This Report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements appear in a number of places in this Report and include all statements regarding the intent, belief or current expectations of the Company, its directors, or its officers with respect to, among other things: (i) the Company's financing plans; (ii) trends affecting the Company's financial condition or results of operations; (iii) the Company's growth strategy and operating strategy; and (iv) the declaration and payment of dividends. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein and those factors discussed in detail in the Company's filings with the Securities and Exchange Commission.

The following discussion of the financial condition and results of operations of the Registrant (the Company) should be read in conjunction with the Company's financial statements and related notes and other statistical information included elsewhere herein.

General
Calvin B. Taylor Bankshares, Inc. (Company) was incorporated as a Maryland corporation on October 31, 1995. The Company owns all of the stock of Calvin B. Taylor Banking Company (Bank), a commercial bank that was established in 1890 and incorporated under the laws of the State of Maryland on December 17, 1907. The Bank operates nine banking offices in Worcester County, Maryland and one banking office in Ocean View, Delaware. The Bank's administrative office is located in Berlin, Maryland. The Bank is engaged in a general commercial and retail banking business serving individuals, businesses, and governmental units in Worcester County, Maryland, Ocean View, Delaware, and neighboring counties.

The Company currently engages in no business other than owning and managing the Bank.

Critical Accounting Policies
The Company’s financial condition and results of operations are sensitive to accounting measurements and estimates of inherently uncertain matters. When applying accounting policies in areas that are subjective in nature, management uses its best judgment to arrive at the carrying value of certain assets. One of the most critical accounting policies applied is related to the valuation of the loan portfolio. Management estimates the appropriate allowance for loan losses, including the timing of loan charge-offs.

The allowance for loan losses represents a reserve for potential losses in the loan portfolio. It is one of the most difficult and subjective judgments. The adequacy of the allowance for loan losses is evaluated periodically based on a review of the loan portfolio, with a particular emphasis on non-accruing, past due, and other loans that management believes require attention. The determination of the reserve level relies on management's judgment about factors affecting loan quality, current trends in delinquencies and charge-offs, and anticipated changes in the composition and size of the portfolio. Management also considers external factors such as changes in the interest rate environment, the view of the Bank’s regulators, economic conditions in the Bank’s service area and beyond, and legislation that affects the banking industry.

Financial Condition
Total assets of the Company decreased $7.7 million from December 31, 2005 to June 30, 2006. Combined deposits and customer repurchase agreements decreased $6.9 million during the same period. During the second quarter of the year, the Bank typically experiences a growth in deposits from seasonal business customers, summer residents and tourists. In 2006, the Bank’s average assets and average deposits decreased modestly from the first quarter to second quarter of 2006 by $1.4 million and $1.3 million, respectively. Management attributes this decrease to 1) increased competition for deposits, evidenced by high rate certificate of deposit "specials" in our market area, 2) a slow down in real estate settlements, reflected in lower attorneys’ account balances, and 3) a return of investor confidence in the stock market, which is causing some reversal of the deposit influx experienced from late 2001 through mid 2004. Management carefully monitors deposit reductions and the effect on liquidity, taking steps to retain core deposits.

During the first six months of 2006, the Bank’s gross loan portfolio has increased $29.2 million. Funding for these loans was provided by a reduction of the investment portfolio. As loans earn at higher average rates than investments, this shift has a positive effect on earnings. The increase in loans does not negatively impact the Company’s ability to meet liquidity demands.

Historically, the Company has low loan charge-offs. Based on a review of the consolidated loan portfolio, the Company determined that an allowance of 0.93% of gross loans was adequate as of June 30, 2006. At December 31, 2005, the allowance was 1.06% of gross loans. At June 30, 2006, loans delinquent ninety days or more and still accruing interest totaled $178,760 or ..08% of the portfolio. At December 31, 2005, loans delinquent ninety days or more and still accruing interest totaled $131,717 or .06% of the portfolio. At June 30, 2006, there was one nonaccrual loan with a balance of $6,601. There were no nonaccrual loans as of December 31, 2005.

The Company makes loans to customers located primarily in the Delmarva region. Although the loan portfolio is diversified, its performance will be influenced by the economy of the region.

Liquidity
The Company’s major sources of liquidity are loan repayments, maturities of short-term investments including federal funds sold, and increases in core deposits. Throughout the first quarter of the year, when the Bank typically experiences a decline in deposits, federal funds sold and investment securities are primary sources of liquidity. During the second quarter of the year, additional sources of liquidity become more readily available as business borrowers start repaying loans, and the Bank receives seasonal deposits. Throughout the second and third quarters the Bank maintains a high liquidity level. Funds from seasonal deposits are generally invested in short-term U.S. Treasury Bills and overnight federal funds.

The Company has available lines of credit, including overnight federal funds, reverse repurchase agreements and letters of credit, totaling $21,000,000 as of June 30, 2006.

Average liquid assets (cash and amounts due from banks, interest-bearing deposits in other banks, federal funds sold, and investment securities) compared to average deposits and retail repurchase agreements were 44.06% for the second quarter of 2006 compared to 47.36% for the first quarter of 2006 and 60.78% for the second quarter of 2005. Contributing to the quarter-to-quarter and year-to-year decreases is growth of the loan portfolio which has been funded by decreased investments in debt securities.

Results of Operations
Net income for the three months ended June 30, 2006, was $1,818,161 or $.57 per share, compared to $1,687,865 or $.53 per share for the second quarter of 2005. This represents an increase of $130,296 or 7.72% from the prior year. Year to date net income has increased $393,238 or $.12 per share from $3,188,324 or $1.00 per share in 2005 to $3,581,562 or $1.12 per share in 2006. The key components of net income are discussed in the following paragraphs.

For the first six months of 2006 compared to 2005, net interest income increased $650,195. Net interest income increased $207,065 in the second quarter of 2006 compared to the second quarter of 2005. This increase is attributable to 1) a shift in earning assets from federal funds sold and investment securities to higher yielding loans, and 2) the steady rise of market rates that began in mid-2004. The Company’s overnight investment in federal funds sold has repriced with the market, while debt securities are repricing more slowly. Although loan rates are relatively unchanged, increases in the loan portfolio contribute to increased net interest spread. The Company’s Management has implemented gradual increases to deposit rates in response to market pressures.

The tax-equivalent yield on interest earning assets increased by 97 basis points from 4.87% for second quarter 2005 to 5.84% in 2006. The quarterly yield on interest-bearing liabilities increased by 72 basis points from .64% in 2005 to 1.36% in 2006. Combined, the result is an increase in net interest margin of 51 basis points.

No provision for loan losses was charged to expense during the first six months of 2006 or 2005. Net loan charged-offs (recoveries) were ($69) during the first half of 2006 versus ($14,332) in the same period in 2005.

Noninterest revenue for the second quarter and year-to-date exceeds last year by $55,583 and $101,548, respectively. Two factors contribute significantly to this increase. In January 2006, the Bank increased service charges and deposit account activity fees. Additionally, fees related to use of ATM / VISA debit cards continue to rise due to increased usage.

Noninterest expense for the second quarter and year-to-date exceeds last year by $26,352 and $113,505, respectively. An increase of $111,720 in salaries and benefits for the first six months of 2006 includes a bonus of $48,300 which was paid to nearly all employees. The Bank employed 99 full time equivalent employees as of June 30, 2006. The Bank hires seasonal employees during the summer. The Company has no employees other than those hired by the Bank.

Income taxes are $106,000 higher than the same quarter last year, on a pre-tax income increase of $236,296. For the first six months of 2006, income taxes are $245,000 higher than last year, on a pre-tax income increase of $638,238. The Company’s effective tax rate for the first six months of 2006 increased to 35.9% from 35.6% in the same period in 2005.

Plans of Operation
The Bank offers a full range of deposit services including checking, NOW, Money Market, and savings accounts, and time deposits including certificates of deposit. The transaction accounts and time certificates are tailored to the Bank’s principal market areas at rates competitive to those offered in the area. In addition, the Bank offers certain retirement account services, such as Individual Retirements Accounts ("IRAs"). All deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount allowed by law (generally, $100,000 for non-IRA accounts per depositor and $250,000 for IRAs per depositor, subject to aggregation rules). The Bank solicits these accounts from individuals, businesses, associations and organizations, and governmental authorities.

The Company, through the Bank, offers a full range of short- to medium-term commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements), and purchase of equipment and machinery. Consumer loans include secured and unsecured loans for financing automobiles, home improvements, education, and personal investments. The Company originates commercial and residential mortgage loans and real estate construction and acquisition loans. These lending activities are subject to a variety of lending limits imposed by state and federal law. The Bank may not make any loans to any director or executive officer (except for commercial loans to directors who are not officers or employees) unless the Board of Directors of the Bank approves the loans. The Board of Directors reviews these loans every six months.

Capital Resources and Adequacy
Total stockholders’ equity increased $3,665,971 from December 31, 2005 to June 30, 2006. This increase is attributable to comprehensive income recorded during the period, as detailed in Note 2 of the Notes to Financial Statements, reduced by $55,512 used to repurchase and retire 1,542 shares of common stock. Stock repurchases were at a price of $36.00 per share.

Under the capital guidelines of the Federal Reserve Board and the FDIC, the Company and Bank are currently required to maintain a minimum risk-based total capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1 capital consists of stockholders' equity less accumulated other comprehensive income. In addition, the Company and the Bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total assets) of at least 4%, but this minimum ratio is increased by 100 to 200 basis points for other than the highest-rated institutions.

The Company’s principal market risk exposure relates to interest rates on interest-earning assets and interest-bearing liabilities. Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company and the Bank are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company's performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management monitors and seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

At June 30, 2006, the Company’s interest rate sensitivity, as measured by gap analysis, showed the Company was asset-sensitive with a one-year cumulative gap of 30.03%, as a percentage of interest-earning assets. Generally asset-sensitivity indicates that assets reprice more quickly than liabilities and in a rising rate environment net interest income typically increases. Conversely, if interest rates decrease, net interest income would decline. The Bank has classified its demand mortgage and commercial loans as immediately repriceable. Unlike loans tied to prime, these rates do not necessarily change as prime changes since the decision to call the loans and change the rates rests with management.

Disclosure controls and procedures are designed and maintained by the Company to ensure that information required to be disclosed in the Company’s publicly filed reports is recorded, processed, summarized and reported in a timely manner. Such information must be available to management, including the Chief Executive Officer (CEO) and Treasurer, to allow them to make timely decisions about required disclosures. Even a well-designed and maintained control system can provide only reasonable, not absolute, assurance that its objectives are achieved. Inherent limitations in any system of controls include flawed judgment, errors, omissions, or intentional circumvention of controls.

The Company’s management, including the CEO and Treasurer, performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2006. Based on that evaluation, the Company’s management, including the CEO and Treasurer, has concluded that the Company’s disclosure controls and procedures are effective. The projection of an evaluation of controls to future periods is subject to the risk that procedures may become inadequate due to changes in conditions including the degree of compliance with procedures.

During the quarter ended on the date of this report, there were no significant changes in the Company’s internal control over financial reporting that have had or are reasonably likely to have a material affect on the Company’s internal control over financial reporting. As of June 30, 2006, the Company’s management, including the CEO and Treasurer, has concluded that the Company’s internal controls over financial reporting are effective.

Item 1 Legal Proceedings

Item 1A Risk Factors

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

Item 3 Defaults Upon Senior Securities

Item 4 Submission of Matters to a Vote of Security Holders

Item 5 Other information

Item 6 Exhibits and Reports on Form 8-K

Exhibit 31.1

Certification - Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Raymond M. Thompson, certify that:

Exhibit 31.2

Certification - Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jennifer G. Hawkins, certify that:

Exhibit 32

Certification - Pursuant to 18 U.S.C. 1350

(Section 906 of the Sarbanes-Oxley Act of 2002)

We, the undersigned, certify that to the best of our knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended June 30, 2006 of the Registrant (the "Report"):

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.